Karl Polanyi and the Law of Market Society

International Karl Polanyi Society

Sabine Frerichs

9 May 2018, Vienna Chamber of Labour

Analytical Perspective: Economic Sociology of Law Object of Analysis: The Law of the Market Society Specific Problem: Proliferation of Debt Discharge

Structure

Analytical Perspective: Economic Sociology of Law

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A Polanyi-inspired Research Agenda

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Economic Sociology of Law (I)

Economics Law

Sociology

Law &Society

Law &Economy

Economy& Society

EconomicSociology

of Law

Economic sociology not only includes a ‘sociology of economy’, but also a ‘sociology of economics’: a sociology of the economic discipline, and of scientific knowledge more generally.

Likewise, the sociology of law includes a ‘sociology of jurisprudence’, that is, a critical interest in legal scholarship, which it shares with critical legal studies.

In the economic sociology of law, the cognitive turn from the subject matter of the law and the economy to the disciplines constructing and reproducing these spheres of reality, takes the form of a criticism of law and economics, or of any positive (or normative) theory that describes (or prescribes) how legal and economic rationalities are (to be) mediated.

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Economic Sociology of Law (II)

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Levels of Analysis

“[I]n what ways, if any, are the cognitive infrastructures of markets –and therefore the particular forms of calculative rationality characteristic of such markets – created, entrenched, and mobilized through law and legal practices? What, in other words, is law’s role in the construction, maintenance, and transformation of frameworks of knowledge and their associated practices of economic rationality in particular market contexts?” (Lang 2013, 170)

“In recent years, the relationship between law and the economy has been front and center in policymaking around the world, in courts, and in law schools, largely as a result of the law and economics (L&E) movement. L&E has been extremely influential in the policy realm, so much so that concepts of law and justice are increasingly defined in economic terms and understood through the lens of market efficiency.” (Edelman 2004, 182; original emphasis)

Legal Construction ofEconomic Rationalities

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Mutually Constitutive Rationalities

Economic Construction of Legal Rationalities

The functional approach to economic law “cuts across the boundaries between traditional fields of law and those between legal systems”.

“Rules that are part of traditional fields of law (egconstitutional law, company law, contract law, tax law, private international law, procedural law, etc) also form part of economic law if, and to the extent that, they are relevant to the establishment and functioning of an economic system.

[T]he sources of these latter rules may be located within various legal systems: of a national, trans-national, regional, supranational or international nature.”

(Ortino and Ortino 2008, 95; original emphasis)

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Defining Economic Law

“The law of the market economy has a wide scope. It covers law which sustains, promotes, curtails and adjusts the structure of a free market.”

“Consumer protection law is susceptible to neither neat nor narrow definition. Its scope is open-ended. It embraces both private law and public law; it requires appreciation of both national and transnational law.”

“[T]he map of consumer protection law has fuzzy edges and one should know what lies beyond, including paths to other areas of law and the bridges to other academic disciplines such as economics, politics, sociology and psychology.”

(Howells and Weatherill 2009, 5)

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Focusing on Consumer Protection

Object of Analysis:Law of Market Society

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As an institution, law ‘institutes’ the economy. Law can be conceived as the ‘fifth’ institution that mediates between the

key institutions of the international political economy: gold standard, balance-of-power system, liberal state, and self-regulating market.

As a ‘commodity’, law is subject to market forces. Law can be conceived as a ‘fourth’ commodity that may take embedded

or commodified forms, similar to other ‘fictitious commodities’: land (nature), labour (humans), money (credit), law (solidarity).

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Law as Institution and Commodity

Karl Marx

Evgeny Pashukanis Isaac Balbus Pierre Bourdieu

Beyond the debate of formalism vs instrumentalism

Focus on interactions between law and economics

Karl Polanyi

Neo-Polanyian perspectives

Role of the law in the commodification process

Potential of the law for decommodification

Law in Modern Capitalism

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A Critique of Jurisprudence

Law of Market Society

Technically, commodification means that the fictions of the economic discipline are translated into legal concepts.

Reversing this perspective, Supiot(2007, 94) speaks of the “dogmatic foundations” of the market in “legal fictions”.

The concepts of private property, contract of will, and legalpersonhood reflect the necessities of market exchange in capitalist societies.

Land, labour, and money can only be bought and sold for a market price by abstraction from their natural, social, and cultural underpinnings.

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Economic and Legal Fictions

Similar to labour, land, and money, law can itself become subject to market forces and, in that way, commodified.

The commodity character of law is most concrete when regulatory competition allows a ‘law market’ to arise, and certain legal rules or regimes can be marketed and shopped for at the national, regional or global level.

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Commodification of Law (I)

In more abstract terms, the commodification of law is also furthered by the rise of ‘economic constitutionalism’, which prioritises the “‘functional unity’ of private and public, national and international regulation of the economy” (Petersmann 2011, 536).

Likewise, the ‘economic analysis of law’, which explains legal regimes in terms of rational choice (positive analysis) and evaluates their contribution to economic efficiency (normative analysis), implies a commodified understanding of law (cf. Brion 2000).

A la Européenne

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Commodification of Law (II)

A l’Américaine

Durkheimian Williamsonian

Authoritative organization Voluntary coordination

Creation of obligations Reduction of transaction costs

Public order Private ordering

Government Governance

Obligational Voluntaristic

Exogenously imposed Endogenously contracted

Third party enforcement Self-enforced

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Two Types of Institutions (I)

(Streeck 2009, 155)

Streeck (2009, 252; original emphasis) points out that “Polanyianinstitutions that are market-breaking rather than market-making probably need to be Durkheimian in character: public rather than private, obligatory rather than expedient, and political instead of economic”. In practice, we may observe an opposite trend: law becomes more private, voluntary, and economic again.

In capitalist economies, the “slowly grinding force” of private interest also gnaws at the law (ibid., 146): non-contractual institutions that impose social obligations from above (as part of the public order, or authoritative forms of organisation) tend to be replaced by privately contracted institutions that result from individual choices from below (as part of systems of private ordering that facilitate voluntary coordination).

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Two Types of Institutions (II)

19th century: The rise and fall of market economy Polanyi (1944): The Great Transformation

20th century: The rise and fall of social market economy Streeck (2009): Re-forming Capitalism

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The Great Transformation Continued

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Law’s Great Transformation (I)

Market exchange is embedded in law, and law is embedded in society. Polanyi speaks of an (undifferentiated) complex of “custom and law, magic and religion”.

The “laws governing a complex society” discovered by the economic discipline have the status of “laws of Nature”. The principle of laissez-faire is enforced by the ‘liberal state’. For Polanyi, self-regulating markets ”required that the individual should respect economic law even if it happened to destroy him”.

The axiomatic language of economic liberalism is contested; its naturalist vision of law is replaced with an agenda that includes law as a means of progressive politics.

Disembedding

Re-embedding(Polanyi 1957, 55, 83, 125)

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Law’s Great Transformation (II)

19th century: universalist origins 20th century:

national closings

21st century: transnational openings

11th century: universalist origins

Berman (2003, 22–23) links the Western legal tradition, which spans a millennium “from the eleventh to the twenty-first century”, with “‘the rise of the West’ as a great economic power in the world”.

“For example, the elaborate rules of contract law and of credit transactions that were developed in both the new Roman law and the new canon law in the twelfth and thirteenth centuries survived successive economic changes and were an essential foundation of the laissez-faire capitalist economy that emerged in the nineteenth century.” (ibid., 377).

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11th-21st Century: Western Legal Tradition

“the rise of Classical Legal Thought between 1850 and 1914” “the liberal attack on mercantilist […] economic and social policy making” “the creation of a first global system of international economic law, based

on free trade, the gold standard, and private international law (often applied by arbitrators) to settle disputes”

(Kennedy 2006, 19, 20, 29, 30)

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19th Century: Universalist Origins

“[the rise of] socially oriented legal thought between 1900 and 1968” “rethinking law as a purposive activity, as a regulatory mechanism that

could and should facilitate the evolution of social life in accordance with ever greater perceived social interdependence”

“redefining as public law vast areas that had fallen safely within the [private law] domain of right, will, and fault”

“[a] ‘national strategy” based on bilateral agreements and […] on the formation of blocs”

“the creation, for the capitalist core countries, of the nationally and internationally regulated market economy”

(Kennedy 2006, 19, 22, 43, 56-57)

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20th Century: National Closings

“privatisation of the function of law” “transforming private international law from a national democratic law for

the co-ordination of national and foreign legal systems in the light of social transnationalisation into a framework law in which private actors should be able to choose as freely as possible which national legal norms should, in each case, apply to the private legal relations that concern them”

(Rödl 2009, 40-41)

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21st Century: Transnational Openings

Model 1 Model 2 Model 3

11th-18th Century:Universal Ius Commune

18th-19th Century: National Civil Codes

20th Century: Social Function of Private Law

Ius Commune: From Pre- to Post-National

Preparations for a European Civil Code

Ius Communitatis: EU Regulatory Private Law

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Integration Through Private Law

“In the analyses of what, very generally, could be called social justice in contract law, the change is often pictured by the help of dichotomies like freedom versus solidarity, individualism versus altruism, and market-individualism versus consumer-welfarism to mention but only a few. […]

In the European setting these dichotomies and new concepts, which typically refer to the growth of mandatory rules protecting weaker parties like consumers in the contractual relationship, can be said to reflect the intrusion of the values of the welfare state into the market-oriented structure of traditional contract law.

Therefore the new features are also called ‘welfarism in contract law’ for short.”

(Wilhelmsson 2004, 712-713; references omitted)

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Welfarism in Private Law (I)

1. Market-rational welfarism Regulation aimed at improving party autonomy and the function of the market mechanism (e.g. information rules)

2. Market-correcting welfarism Regulation aimed at rectifying outcomes of the market mechanism in order to promote acceptable contractual behaviour (e.g. substantive fairness rules)

3. Internally redistributive welfarism Regulation aimed at redistributing benefits in favour of a group of weaker parties in a contractual relationship (e.g. rules affecting main subject matter of contract)

4. Externally redistributive welfarism Regulation aimed at redistributing benefits in favour of the disadvantaged within a group of contract parties in similar situations (e.g. equality rules)

5. Need-rational welfarism Regulation aimed at giving benefits to parties with special needs in comparison with other parties in similar situations (e.g. rules on social force majeure)

6. Public values welfarism Regulation aimed at giving contract law protection to interests and values not related to the parties (e.g. protection of environmental values and human rights)

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Welfarism in Private Law (II)

(Wilhelmsson 2004, 725)

The decommodification of social relations was reflected in an increasing welfarism in economic law, with the ‘juridical rationality’ of enabling market law being counterweighed by a more ‘instrumentalist rationality’ of regulatory intervention.

While the regulatory law of the welfare state was also redistributive in nature, this link can no longer be taken for granted. In fact, ‘law after the welfare state’ (Zumbansen 2008) combines a new, legal formalism with a new, economic functionalism.

The novelty of the present constellation is not that juridical and instrumentalist rationalities are combined but that the reference point of both facilitative and regulatory law is increasingly trans-, supra- or post-national in character.

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Welfarism in Private Law (III)

Specific Problem:Proliferation of Debt Discharge

29

“For thousands of years, the struggle between rich and poor has largely taken the form of conflicts between creditors and debtors.

By the same token, for the last 5000 years, with remarkable regularity, popular insurrections have begun the same way: with the ritual destruction of the debt records.”

(Graeber 2011, 8)

30

5000 Years of Debt (I)

• “History tends to move back and forth between periods dominated by bullion – where it’s assumed that gold and silver are money – and periods where money is assumed to be an abstraction, a virtual unit of account.”

• “If history holds true, an age of virtual money should mean a movement away from war, empire-building, slavery, and debt peonage (waged or otherwise), and toward the creation of some sort of overarching institutions, global in scale, to protect debtors.”

(Graeber 2011, 214, 383)

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5000 Years of Debt (II)

32

2500 Years of Bankruptcy Law

16th-18th

centuryCommercial capitalism

19th-20th

centuryIndustrial capitalism

20th-21st

centuryFinancial

capitalism

Individual bankruptcy

Corporate bankruptcy

Consumer bankruptcy

Roman law

Legalisationof interest

Predatory lending (caveat debitor)

Responsible lending (caveat creditor)

?

From person to property not the person is liquidated but the

property

From detention to activation debtors get out of prison and back to

the market

From moral failure to economic risk the debtor is no longer regarded as a

criminal but as a risk-taker

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Normalisation of Bankruptcy

Concerned with the causes and prevention of over-indebtedness and social exclusion

Focus on consumer transactions, namely credit contracts

E.g., ‘responsible lending’

Concerned with the negative effects of over-indebtedness and how to remedy them

Focus on personal insolvency, namely consumer bankruptcy

E.g., ‘fresh start’

Ex-ante perspective

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Regulating Over-Indebtedness

Ex-post perspective

(Domurath and Micklitz 2015, 6; Ferretti et al. 2016 a,b)

“Judicial and legislative intervention [in private law relations] may be directed at the realization of conceptions of social justice.

Consumer protection is but part of this field of inquiry into the limitations of contractual freedom as a basis for delivering a fair distribution of resources, a perception that invites attempts to adapt the law to a more overt control function, rather than allocating that task exclusively to the tax and welfare systems.”

(Howells and Weatherill 2009, 8-9, 32)

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Regulation Through Contract Law

“Insolvency is an area of law clearly categorised as ‘private law’ and involving, inter alia, the rights of creditors against debtors. […]

The focus of insolvency law is seen squarely to be on the rights of creditors against a particular debtor(s) and what those creditors will receive by way of payment (if anything).”

“[T]he public interest involves taking into account interests which society has regard for and which are wider than the interests of those parties directly involved in any given insolvency situation, that is, the debtor and the creditors.”

(Keay 2000, 509, 525)

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Regulation Through Insolvency Law

Consumer Credit Capitalism (I)

welfare

debtfare

warfare

workfare

activation in the labour market

activation in the credit market

loss of ‘unconditional’ entitlements

“Instead of governments taking on debt to stimulate the economy, individuals did so.”

(Crouch 2009, 390)

PrivatisedKeynesianism

37

”This shift towards so-called ‘privatised Keynesianism’ is characterised by an emphasis on competition in private capital markets and diminished state authority. Privatisation in this context refers to reliance on ‘consumer credit capitalism’ based on the expansion of consumer credit, including home mortgages, car loans and credit card debt.”

“In such a political economy, the design of contracts determines, if, how and under what conditions consumers become indebted, and thus how welfare is allocated. This means that contract rules that allocate rights, risks and obligations between the parties have a strong normative salience.”

(Domurath 2016, 759; references omitted)

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Consumer Credit Capitalism (II)

39

Consumer Credit Capitalism (III)

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Evolution of Personal Insolvency Law (I)

(Ramsay 2017, 3-4: reforms of personal insolvency / debt adjustment law since 1978)

Introduction of a debt discharge in many European countries US ‘fresh start’ and German ‘earned start’ as alternative models Emerging international/European consensus on personal insolvency

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Evolution of Personal Insolvency Law (II)

Germanic approachEarned startDebtor as wage earner‘Liability model’

American approachFresh startDebtor as active consumer‘Market model’

English approachSocial controlDebtor as social deviant‘Restrictions model’

French / ScandinavianapproachSocial policyDebtor as welfare client‘Mercy model’

42

Evolution of Personal Insolvency Law (III)

Pro-market(reliance on market forces)

Pro-state(discretion of public officials)

Pro-

debt

or(l

et t

he c

redi

tor

bew

are)

Pro-

cred

itor

(let

the

deb

tor

bew

are)

(drawing on Heuer 2014)

“This US ‘open credit economy’ and approach to credit regulation in a minimal social welfare state contrasts with a European social model of solidarity providing a greater level of security for citizens through state regulation and redistribution.

If, however, European countries are increasingly adopting the US model of the role of credit in the economy then one might, ceteris paribus, expect the growth of similar models of bankruptcy.

The development of personal insolvency in Europe is linked to credit liberalization since the 1980s and the subsequent crises and social costs associated with the growth of over-indebtedness.”

(Ramsay 2017, 29-30; references omitted)

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Explaining Divergence/Convergence (I)

“[T]his book rejects the story that US consumer bankruptcy law reflects an enduring cultural characteristic of the US or that there is ‘an American cultural of maximal consumer sovereignty and [a] European culture of maximal consumer protection’.”

(Ramsay 2017, 30; reference omitted)

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Explaining Divergence/Convergence (II)

“During this period, personal insolvency and credit regulation were treated as separate spheres, the former part of the social problem of over-indebtedness, the latter an economic aspect of the establishment of a single EU credit market.”

Consumer Credit Directives before the crisis focused “primarily on promoting market growth and the ‘front end’ of credit markets with a nod to responsible lending in the 2008 credit directive”.

Insolvency reform focused on business and corporate insolvency “with the objective of preventing forum shopping and ensuring mutual recognition of insolvency proceedings throughout the EU”.

(Ramsay 2015, 191; Ramsay 2017, 170, 172)

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Financial Regulation Before the Crisis

“Despite tremendous intellectual investment in consumer credit research attempting to introduce a collective or societal dimension to consumer credit through the concept of social force majeure, this did not materialize.

In fact, it was not the social dimension but the economic dimension behind consumer credit which smashed the genuine individual and individualistic concept of consumer credit and consumer insolvency.”

“The shift from micro to macro, from individual consumer insolvency to collective household debt, from social concerns to economic concerns, entails consequences for contract law and private law.”

(Micklitz 2015, 231, 233; reference omitted)

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Financial Regulation After the Crisis

Economic Mainstream and Its Critics

Political Economy

Social Economy

Rational Choice

Approach

ClassicalPoliticalEconomy

Neoclassical Economics

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Law and Economics

PublicChoice

New Institutional

Economics

Behavioural Economics

Social Economics

Institutional Economics

Historical Economics

Socio-Economics

New Economic Sociology

Comparative Political Economy

Keynesian economics

Austrian economics

Marxist economics

Feminist economics

Ecological economics

Evolutionary economics

CriticalPolitical Economy

LAW, ECONOMY, AND SOCIETY Studying Law, Economy, and Society: A Short History of Socio-legal Thinking (2012)Law, Economy and Society in the Global Age: A Study Guide (2012)Constitutional Ideal Types in the Global Age: A Sociological Review (2010)

LAW OF MARKET SOCIETY Transnational Law and Economic Sociology (forthcoming)Rome Under Seven Hills: An Archaeology of European Private Law (2015)The Law of Market Society: A Sociology of International Economic Law and Beyond (2016)Re-embedding Neo-liberal Constitutionalism: A Polanyian Case for the Economic Sociology of Law (2011)

LAND: PROPERTY RELATIONS Correlated Ownership: Polanyi, Commons, and the Property Continuum (forthcoming)

LABOUR: SOCIAL RIGHTS From Resource to Burden: Rescaling Solidarity with Strangers in the Single Market (2017)From Social Rights to Economic Incentives? The Moral (Re)construction of Welfare Capitalism (2017)Workers No Longer Welcome? Europeanisation of Solidarity in the Wake of Brexit (2016)

MONEY: DEBT RELATIONS Debt Commodification and the Normalisation of Bankruptcy (Ms)Unravelling the European Community of Debt: Introduction to Special Issue (2017)From Credit to Crisis: Max Weber, Karl Polanyi, and the Other Side of the Coin (2013)

LAW: ECONOMIC CONSTITUTION The Money Method: Decision-Making in the EMU Under the Premise of Integration Through Finance (Ms)The Rule of the Market: Economic Constitutionalism Understood Sociologically (2017)Money Matters: The Heads and Tails of Conflicts-Law Constitutionalism (2014)

PERSONS: BEHAVIOURAL TURN Bounded Sociality: BE’s Truncated Understanding of the Social and Its Implications for Politics (Ms)What Is the ‘Social’ in BE? The Methodological Underpinnings of Governance by Nudges (forthcoming)False Promises? A Sociological Critique of the Behavioural Turn in Law and Economics (2011)

Related Writings

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DEPARTMENT OF SOCIOECONOMICSInstitute for Sociology and Social ResearchWelthandelsplatz 1, 1020 Vienna, Austria

SABINE FRERICHSProfessor of Economic Sociology

T +43-1-313 36-5886F +43-1-313 36-90707sabine.frerichs@wu.ac.atwww.wu.ac.at/sozio

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Many thanks for your attention!